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January 2009

When I talk to other lawyers about value pricing, one of the most common objections I hear goes something like this:

"But if I don't know how long something takes, how am I going to know how much it's worth? And how is the client going to know? And what happens if we sail off the edge of the earth?"

OK, maybe I'm exaggerating with that last one. But you get the idea. Most lawyers are so brainwashed about billable hours that they fail to understand how valuing and pricing work in the real world. Even though they do it all ... the ... time.

Watch this real-life example ...

Hey, you! Yeah, you in the downtown office of the white-shoe law firm. Look at that fancy watch on your wrist. What is it? A Tag Heuer? A Breitling? Nice. How much did it cost? $1,500? $3,000? Wow.

Now how do you think the jeweler came up with price? Counted up the number of hours that a handful of Swiss horologists spent constructing it, then added in the cost of the titanium and steel and so forth? Please.

For that matter, how did you — the buyer — decide how much the watch was worth? Did you ask the jeweler how many hours the aforementioned Swiss spent at the watch factory? Of course not.

The price was set by the jeweler based on his or her estimate of what a successful lawyer like you would be willing to pay for the wristborne status symbol that would show the world what a successful lawyer you are. It's a guess, based on past experience of what other successful lawyers have paid before.

And then you decided whether that price was less than or equal to the value you placed on the watch — what it was worth to you at that time in that place. How much you wanted it or needed it. If the price was too high, you didn't buy it. If enough people don't buy it at that price, the jeweler responds by lowering the price (or by improving his or her marketing).

It's that simple.

So use your fancy watch for something worthwhile, and not for keeping track of your billable hours. Your clients don't value your hours. They value the service you provide. The same way you value your Breitling.

(It's a safe bet that this will be my only post paraphrasing a Jimmy Buffett tune.)

I was out to dinner with a client the other night. He shared with me an anecdote whose lesson is crucial for every outside lawyer.

First, a little about this guy. Most recently, he was both general counsel and chief financial officer of a publicly traded company. He is a classic connector straight out of Malcolm Gladwell's The Tipping Point. He makes friends incredibly naturally, he's not easily offended, and he doesn't particularly hold grudges.

And yet.

And yet we were talking about another law firm, a competitor of mine with a nationwide platform. Turns out a lawyer at this firm had worked with the person who preceded my friend as general counsel. But when my guy assumed the GC post, this firm lawyer never bothered to call him. Didn't call to congratulate him. Didn't call to talk about doing work together going forward. Didn't call at all.

That was years ago. And my friend hasn't forgotten it. Nor will he the next time his firm wants to try and get my friend's business.

The point is that law-firm lawyers fool themselves into thinking that clients will hire them based on their experience, their expertise, their skills, their national presence, and so forth. What they forget is that more often than not, clients will choose not to hire them based on something as simple as a missed phone call.

I can name six different companies that would have been shut down if it weren't for my law firm.

Now, that's not just me bragging or exaggerating or taking more credit than we deserve. In each of the six cases, the company had been founded by someone who had gone into competition with his or her previous employer. In each case, the old company had sued to enforce a noncompete agreement and had asked a court to shut down our client. In each case, we successfully defended the new company, allowing them to stay in business.

Now compare that to other work I've done as an employment lawyer. For example, I'm often asked to write or revise a company's personnel handbook. These handbooks often include provisions that I consider ridiculous. What most drives me crazy are bereavement-leave policies, where employers make hyperlegalistic rules about whose funeral an employee can go to without having their pay docked. (For more on these policies, including an incredible real-world example, see "The world's shortest employee handbook" at our workplace blog, Gruntled Employees.) Needless to say, I'm not a fan of helping an employer decide whether an uncle or a niece is a close-enough relative to justify an employee being allowed time off for the funeral.

As many of our readers know, my firm, Shepherd Law Group, hasn't billed a single hour since 2006. But we used to, and for some of the work I described above, we did.

Hourly billing values equally all the time I spend working for clients, regardless of the project I'm working on, and regardless of the value the client receives.

Is there anyone out there who believes that the work I did to save those six companies from court-ordered extinction was equal in value — on a minute-for-minute, or rather six-minutes-for-six-minutes, basis — to the time I spent tweaking stupid bereavement policies?

If you can honestly say that you think the work was equally valuable, then you are a true defender of the billable hour, and we'd love to hear from you. But I won't hold my breath.

Vanessa is a senior litigation associate at a large Northeast law firm. She is a hard worker, a good writer, and a very intelligent young woman. She bills at $575 an hour. She carefully tracks her time.

One afternoon, she is working on a summary-judgment brief. She is focused on a tricky jurisdictional issue that is central to the case. She has just come up with what she feels is a clever approach based on a casenote she just read. She goes onto Lexis and downloads the case. She prints it and reads it carefully. It seems helpful. She then looks up similar cases, finds 24 of them, and reads or skims all of them. She takes careful notes, and she starts outlining this section of the brief. Then, to her dismay, she finds a more-recent case that changes the law in her jurisdiction. This shuts the door to her clever argument. She puts her research and her notes into a file folder, and she deletes the outline she had been working on.

She checks her computer clock, pulls out her timesheet, and enters the 3.6 hours that she spent on this work, along with a careful description of the tasks she performed.

The next morning, well before sunrise, she's taking a shower. After lathering, rinsing, and repeating, she suddenly gets a brain flash on how to solve a different issue in the case. Collateral estoppel! Of course! As the hot water splashes over her, she realizes that she's just come up with a killer argument for her brief. She'll do the research when she gets into the office, but she's certain it will work.

While she's dressing, she grabs her Blackberry and makes a note of the time she just spent working on her case. She puts down 0.3 (including the rinsing and the repeating), because she spent at least 18 minutes analyzing the issue.

• • •

The brainstorm in the shower proved to be the winning argument in the summary-judgment brief, saving the client hundreds of thousands of dollars by avoiding a trial. The 0.3 hours cost it $172.50, assuming Vanessa did not expense her seaweed conditioner.

The time she spent doing jurisdictional research for her brief proved to be wasted effort. None of that work benefited her client. The 3.6 hours cost her client $2,070 (plus the marked-up cost of the online legal research).

To all you lawyers who bill by the hour: please explain to me why the online-research work was worth 12 times more than the brainstorm in the shower.

If you are paying attention to the value the client receives, you wouldn't bill by the hour.

The Client Revolution is just 11 days old, and our first feature-length review is in. And from none other than Blogcritics Magazine, the online magazine devoted to, well, critiquing blogs. Love their tagline: "A sinister cabal of superior writers." (Note to self: I need to get me a sinister cabal.)

Anywho, Kara Smith has written a wonderful review of this blog. You can check it out here. If you don't know Kara Smith and you're a lawyer or law firm, you'd best stop what you're doing and check out her blog, which has probably one of the five best law-blog names going: Karasma. Kara runs a cutting-edge public-relations boutique (Karasma Media) for the legal-marketing industry, with a particular expertise in social media. In fact, she's got her own law-related revolution going: "A Legal Marketing Revolution Is At Hand," a must-read for any law firm.

So thanks, Kara, for helping give this revolution some much-appreciated publicity and credibility. And keep up the great work with your own revolution.

Southwest Airlines is currently running ads making fun of its competitors for charging extra fees for checked bags, window seats, aisle seats, snacks, curbside checking in, and fuel surcharges. This is smart marketing, because it allows Southwest to differentiate itself from most other airlines. (See this article from aviation website Flightglobal.)

But it's also smart because customers hate to be nickel-and-dimed. The airlines will defend these charges — known as ancillaries — as being necessary to pass along costs to the customers who use these "extra" services. But Flightglobalreports that United Airlines expects its 2009 revenue from ancillaries to climb to $1.2 billion. That's an increase of 140% over the 2005 numbers, and a third more than 2008's take.

This concept of passing along "costs" to customers is silly. How is it that Southwest can successfully price its flights without charging for extra bags, while other airlines can't?

Now go look at your last lawyer bill. Turn to the last page, after all the arcane references to things like "Telecon with Mr. Jones in regards to same." Find where it says "Expenses," and see what you're getting charged for. Most law firms "pass along" the cost of photocopies at ten, 15, or even 25 cents a page. Faxes — who even uses faxes anymore? — will cost you a buck a page. Phone calls? Don't worry — they've kept track.

One of these days we are going to have a computerized system that has voice recognition and you will be able to speak the client's name and the name of the matter, and that system will automatically figure out what the proper client number is and bill that client appropriately for both time and expenses.

and

Believe it or not, our photocopy machine is one of the largest profit centers in our law firm. We charge 25 cents for every photocopy.... I think you will find the philosophy about allocating expenses to those clients who are actually incurring them, instead of absorbing those expenses into your hourly rate that is to be spread over all of your clients, is very innovative.

Right. The firm of the future, indeed.

If your law firm is charging you for copies and faxes and the like, it can only mean one of three things:

They don't really know how to value the services they provide, and thus don't know how to price those services in a profitable way without resorting to "ancillaries" like copying charges.

They do it as a less-noticeable way to squeeze more money out of their clients

They've seen other law firms do it this way, and they don't know any better.

None of these reasons is a very good one. These costs are part of a law firm's overhead, and clients don't care about their lawyers' overhead.

Jim Hassett writes a terrific blawg with an undeservedly generic name, "Legal Business Development." If you're a lawyer, you should be reading it religiously.

[Sidebar on the term blawg: I don't care for it. Why? Because English is primarily a spoken language, not a written language. When you say the word blawg, no one can tell that you mean law blog instead of plain-old-regular-person blog. But I'm just saying. End of sidebar.]

Jim's currently running a five-part series called "The LegalBizDev Guide to Alternative Fees." The first episode came out today: "Alternative fees (Part 1 of 5): What’s wrong with billing by the hour?" Jim's put an awful lot of work into this project, and it shows. If you poke around his website, you can actually read the whole series at once. But that's kind of like watching "24" on DVD — you don't get the anticipation that builds as the week goes on.

I've said it before: I hate the term "alternative billing." (Even more than blawg.) It has a seamy connotation, like "alternative lifestyle." My favorite dictionary, The New Oxford American Dictionary (now available as an iPhone app), includes this definition of alternative:

of or relating to behavior that is considered unconventional and is often seen as a challenge to traditional norms

I guess that's not so bad. Anyway, enjoy Jim's first episode here. Keep up the good work, Jim.

In this "Great Recession of 2008–09," or whatever we'll end up calling it, there is a temptation among law firms (and other companies) to panic over the need to garner new business. This panic can result in an uncontrollable urge to discount and compete on price. This is dumb.

A client will pay what he or she thinks a lawyer is worth, and no more. A lawyer's pricing directly affects how clients and prospects perceive that worth. "If she's only billing at $250 an hour," they say to themselves, "that must be all she's worth."

Don't get me wrong: I'm not suggesting that lawyers do what 71% of the nation's largest firms did this year — raise their rates. Now is not the time for that.

But lowering your prices in the hopes of capturing new business is self-defeating. You are sending a signal that your value is lower than it was. You are also sending a message that you're willing to compromise to get new business. And what will you compromise? Effort? Quality? Availability? Thoroughness? Reliability? Training?

If a client comes to your firm for price, it will leave your firm for price.

Instead of discounting and taking the easy way out, deliver exceptional service and price according to the value the client receives. As JD writes, "It's very hard, and it takes thought." But it's worth it.

As Macworld '09 gets underway Stevelessly in San Francisco, I thought it appropriate to pass along this excellent post from Paul Lippe over at The Am Law Daily, "Welcome to the Future: Is iPhone Quality Possible for Law?" Now, I'm a big Apple fan: our entire law firm is run on Macs, and has been for almost eleven years. We gave every lawyer their own iPhone (which they can use for both work and personal use, and can keep if they leave), having taken a page from Apple itself.

But Paul's post isn't about technology. It's about designing a quality user experience, something that law firms usually ignore. Some law firms pay lip service to quality by embracing mid-1990s business fads like Lean Six Sigma, which focuses on an absence of defects. But here is Paul's money quote on quality:

Now quality, in the modern sense, is not simply the absence of defects. Instead, it reflects the user's total experience with the product or service, including the costs, the ongoing service, and more.

Given the changes in the legal marketplace, he writes, "we are on a quick march to a more modern, complete notion of quality in law."

Paul advocates designing the law-firm experience the way Apple designed the iPhone experience. Read his post, and see what your firm can do to become more iPhonesque.

Lawyers don't tend to pay attention to other businesses when they're deciding how to manage their firms. This is part of the cultish arrogance that goes with having a "profession" instead of a business. The top law schools spend exactly zero time teaching business topics.

We like to pretend that the law is some sort of priesthood, rather than a down-and-dirty trade. Justice Blackmun, writing in Bates v. State Bar of Arizona (the Supreme Court case that made lawyer advertising legal), poured cold water on this concept that lawyering was somehow different from practicing "business":

Early lawyers in Great Britain viewed the law as a form of public service, rather than as a means of earning a living, and they looked down on "trade" as unseemly.... In this day, we do not belittle the person who earns his living by the strength of his arm or the force of his mind. Since the belief that lawyers are somehow "above" trade has become an anachronism, the historical foundation for the advertising restraint has crumbled.

Since lawyers are in fact in the business of business (which, as Calvin Coolidge said, is "the business of the American people"), they would do well to read what other business leaders have to say about business.

Here then, for all you lawyers out there, is Seth Godin on pricing. Seth writes what's been called the most popular marketing blog in the world, entitled (aptly) Seth's Blog. It should be required reading for anyone in business — and that includes all lawyers — who wants to serve clients better. Seth had a post a couple days ago called "Change your pricing." It's quick and easy, like all his posts, and yet it contains a lifetime supply of wisdom. It asks the question of why some businesses can change the way they price their products and services — like restaurants and insurance companies — and others — like (notably) law firms — seemingly can't. The money quote:

So it's another gray New England winter afternoon, which means it's time for my caffeine fix. I walk down the street to my usual Starbucks, but for some reason the line is longer than usual and I don't feel like waiting. Then I notice a coffeehouse that I had never seen before. It's surprising because it's bigger than normal and has a very staid, conservative name. More like a string of names, actually, followed by a "P.C." I take this to mean "professional coffeehouse," or something.

The first thing I notice inside is that the décor is heavy on the mahogany and expensive modern art. A sign on the wall talks about how they have stores in 30 states and eight countries, and that they just opened a location in Shanghai. The sign suggests that they're very excited about this.

I go to the counter and I'm greeted by a tired-looking twentysomething. Her nametag says she's a "Coffee Associate." She asks me what I would like, which I expected, but then she asks me when I need it by, which surprises me.

"As soon as possible," I say. "Is that going to be a problem?"

"Well, it depends," she says. "There are a lot of variables involved. It's hard to say." She then starts talking about arcane developments in coffee production, bean types, and brewing methods. She uses a kind of jargon that I can't really follow, and though I have the sense that it was second nature to her, I'm not sure she really understands it herself.

"How do you want your latte?" she asks. I tell her: triple shot, nonfat milk, extra hot. She writes this all down very carefully on the side of the cup. Then she walks over to a coworker, whose name is Dave. I notice that his nametag identifies him as a "Coffee Partner," so I assume he's some kind of supervisor. They discuss something — I'm not sure what, but I'm hoping it's my coffee order.

They finish their conversation, and then she walks over to a back corner where there's a desktop computer with the store's logo on the screen. She taps away at the keyboard, all the while taking notes from her research. After a while, she logs off the computer, then delivers her written notes to the supervisor. They have another discussion.

I'm starting to get impatient. "Is my coffee on its way?"

She smiles apologetically and assures me it's coming soon. "I just have to talk to Elizabeth about the extra-hot issue. She's our dairy specialist." And she walks away and confers with another woman who I assume is Elizabeth.

When I'm all but delirious from my lack of caffeine, my barista finally tells me that my latte is ready. It seems well made, and it tastes fine, although I would have preferred to have it more quickly. The young woman thanks me and wishes me a good day.

"But I haven't paid you yet."

"Oh, don't worry," she says. "We'll send you an invoice."

Nearly two months later, I receive an envelope with the name of the coffee company on it. By now, I've already forgotten what I had gotten. I open the envelope and nearly faint.

"What the heck?"

Inside is a three-page invoice. The dollar amount is outrageous for a cup of coffee. But what's truly staggering is the level of itemization. First, there's a charge for the young woman's time with the following description:

Conference with customer in regards to customer's preference for beverage. Further discussion with same in regards to size, temperature, and fat content. Online research conducted in regards to same.

The time she spent is tracked to the nearest tenth of an hour.

Next is an entry for the time that she spent speaking with Dave the coffee partner about my order, as well as an entry for his time speaking with her. I notice that his rate is considerably higher. Then there is a pair of entries for the woman's conversation with Elizabeth the dairy specialist, covering both women's time. Again, the dairy partner has a high rate.

Underneath the time entries is a section for expenses. There's a charge for the paper cup, a charge for the cardboard sleeve, a charge for the fancy raw sugar in the brown packets. There was a charge for the stirrer and a charge for the lid. There was also an "online research" charge. And there was an energy surcharge for the additional steam required to make my latte extra hot.

I am livid. I pick up the phone and dial the number on the invoice. I ask for Dave the coffee partner, and after several tries, I finally reach him. I ask him why all this stuff is on the bill.

"Those were the costs of producing your cup of coffee, sir. We have to charge you for the costs, or it wouldn't be fair to the other customers."

"But a charge for the cup?" I ask. "Everyone gets a cup. Why is there a charge for it?"

"We charge you our cost, plus a reasonable markup," he says. "Same with the lid and the sugar and the other client expenses."

I am unmollified. "What about these so-called internal conferences that my barista had with you and the dairy specialist?"

"Well," says Dave, "she's just a first-year coffee associate. It's part of her training. She needs to consult with experienced coffee partners."

"Hmmpf," I say. "I'm not sure I should have to pay for her training. Plus, it ended up taking an awfully long time to get my coffee."

"I understand, sir. But we want our associates to be as thorough as possible." He pauses. "I'll tell you what: I can take ten percent off the bill."

• • •

Lawyers: if you're using cost-plus pricing (to wit, billable hours and marked-up expenses), keep in mind that your clients are probably just looking for a fast cup of joe.

No, not that Adam Smith. Adam Smith as in Bruce MacEwen, who writes the definitive blog on law-firm economics called "Adam Smith, Esq."

[By the way, lawyers — let's get something straight: you cannot call yourself "Esquire." It is an honorific. You use it to honor someone, which is bizarre, because no one really honors lawyers anymore. It's like giving yourself a nickname. You just can't do it, T-Bone.]

In his post, "Rumors of Its Demise," Bruce (who's not calling himself "Esq."; he's referring to Adam Smith) gives a fantastic summation of the problems of the billable hour. Many people talk about inefficiency and economic disincentives, but Bruce (correctly) boils it all down to trust:

Doesn't it fundamentally reflect a lack of trust between your firm and your clients? Rather than being able to say "For professional services rendered...." and have confidence that the client will trust you to have put a fair price on things, the billable hour reflects a green eye-shade mentality, notoriously subject to auditing .... The billable hour, I believe, starts from a relationship of mistrust: "See, we can prove we actually did the work!" And the GC or other inhouse counsel can, in turn, tell their finance department, "Yes, see, they really did the work."

This is not the premise from which mature relationships of trust and confidence arise.

Bruce also points out the difference between setting prices based on production costs (hours spent) instead of based on client value:

At the risk of piling on, I'll suggest yet another reason the billable hour disserves our profession: Economically, it begins life with "cost of production" rather than "value to client." Except for the rawest and most basic of commodities, "cost of production" should have virtually nothing to do with price.

...

But for price to be mathematically determined to the second decimal place by "cost of production" is flatly irrational. Worse, it ignores (again) what the perceived value of the services is to the client.

Read the whole post here. If you're a lawyer, you'll be asking yourself why you bill by the hour. And if you're a client, you'll be asking that of your lawyers.

Enough of the hourly billing rates spiraling upward to where they sometimes need a comma. Enough of the documents laden with legalese and obfuscation and pomposity that makes a real person say, "A lawyer wrote this." Enough of the office memorandums and dissertations on arcane caselaw when all you want to know is how to fix your problem. Enough of the first-year associates who make $160,000 a year and work under constant pressure to bill ... more ... hours.

There is a conflict between law firms and their clients that is built into the legacy systems that most firms cling to. Legal services are sold under a cost-plus pricing model. There is no incentive to be efficient; in fact, the law firm is penalized for efficiency by not being able to charge as much (because it would be billing fewer hours). When a law firm pitches to a client, the lawyers focus on their experience and expertise — how good they are. ("And did we mention that we have an office in Prague?") And that's fine, to a point. But they never talk about how they can save the client money. Or how they can fix the client's problems faster.

Legal advice is about the only product where you must agree to purchase it before you know what it's going to cost. (Imagine going to a car dealership where the price stickers were covered up. "I'd like the red one. How much does it cost?" you ask. "Can't tell you. It depends. You have to agree to buy it first.")

Ever ask why they can't tell what the work will cost? Usually, you get an answer along these lines: "Because there are too many variables. We just don't know what it's going to cost."

Look: if you need a lawyer, that means you're already facing some uncertainty. Why must the lawyer give you more uncertainty? If the lawyer doesn't know what it's going to cost, and the lawyer's the "expert," then who does know?

Other service providers face variables in their lines of work. If you fly from Boston to Chicago, you pay a certain price for your ticket. That price might vary based on a host of factors, but at least you'll know the amount before you agree to fly. What if you hit a big headwind over Ohio? The plane's going to burn more jet fuel than expected. What if there are delays at O'Hare? More jet fuel. What if a snowstorm causes you to get rerouted to Atlanta? Even more jet fuel, overtime, maybe even a hotel room. The airline's not going to hit you up for all these extra costs. Why should a lawyer?

Part of the reason that lawyers are different is because lawyers believe they are different. Many lawyers don't think of themselves as businesspeople. Instead, they are "practitioners." The law is a "profession," not a "trade." This way of thinking, this guild mentality, leads to arrogance, and a failure to focus on the clients' needs.

This blog is all about reversing that trend. We have some experience in this. Our law firm, Shepherd Law Group (a Boston firm that fixes companies' workplace problems), hasn't billed a single hour in over two years. And there are other voices out there, too. Look down the right side of the page at the blogs and books that are carrying the torch for clients.

Below are some client-related posts republished from our sister site, Gruntled Employees, which is a blog for people who deal with employees.

We want to hear from you. If you're a law-firm client, and you have something to complain about, or something to praise, email me (the link is at the top right). If you're a lawyer (or other professional) who's casting aside the legacy systems and sticking up for clients, let me know. And if you disagree, and want to defend the Old World model, I'm happy to hear you out and have an open dialogue.